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Tech stocks are taking a beating this week as they prove less resilient to the economic downturn than investors had hoped.
What is happening: Sluggish results from parent companies Google Alphabet (GOOG) and Microsoft (MSFT) weighed on markets on Wednesday, showing that this year’s $5.5 trillion selloff has yet to bottom. The tech-heavy Nasdaq ended the day down 2%. Then Facebook parent company Meta Platforms (FB) reported weaker-than-expected results after the market close, sending its shares down 20% in premarket trading.
The big picture: We’re in the thick of third quarter earnings season, and so far things haven’t been too bad. The big banks mostly met or exceeded expectations, and Netflix (NFLX), which took a big hit earlier in the year, even showed a nice rebound. Markets rallied from late last week to early this week on this earnings momentum.
But disappointing earnings from Big Tech stocks tend to transform the broader market south thanks to their immense market value.
Beyond determining market sentiment, tech earnings also offer important clues about where the economy is headed. Indeed, the forward-looking multinational industry is particularly sensitive to inflation, rising interest rates and a strong dollar.
So far, what we’re seeing is shaking investors. Alphabet, Microsoft and Meta Platforms reported that a slowdown in the global economy was hitting their businesses.
Microsoft beat expectations but reported its weakest revenue growth in five years on Tuesday as rising energy costs and a strong U.S. dollar reduced profits. In particular, sales growth in the cloud business — one of the company’s biggest bright spots in recent years — has been lower than analysts had hoped. Its fiscal forecast for the second quarter fell short of Wall Street estimates, sending stocks down 8% on Wednesday.
Alphabet, meanwhile, missed earnings expectations as ad sales slowed to their slowest growth rate since the pandemic-induced recession. Profits fell 27% from last year and the company’s shares fell nearly 10% on Wednesday
Alphabet CEO Sundar Pichai warned that the company should be “responsive to the economic environment”, indicating that cost-cutting measures such as layoffs are coming.
Meta Platforms also reported a shortfall per share and saw revenue fall about 4.5% from the same period last year. The company, which owns Facebook, Instagram and Whatsapp, warned Wall Street that its growth forecast for the rest of the year would be lower than forecast and that layoffs and cost cuts were ahead.
The bottom line: “Meta, Alphabet and Microsoft should be able to weather the ups and downs of revenue growth, as long as they can stay productive,” said Columbia Business School professor Dan Wang, but in the environment current “there is little evidence that these companies can sustain the same level of productivity.
Big Tech reached new heights over the past decade as companies benefited from low interest rates and low inflation environment. This is no longer the case. These gains indicate that it will not be for some time.
Coming : Apple (AAPL) and Amazon (AMZN) report after market close Thursday.
Sales of new homes fell in September as rising mortgage rates pushed some buyers away from the housing market, reports my colleague Anna Bahney.
New home sales fell 10.9% in September from August and 17.6% from a year ago, according to a joint report by the US Department of Housing and Urban Development and the US Census Desk.
“New home sales took a hit in September, battered by rising mortgage rates that are now hovering around 7%,” said Robert Frick, business economist at Navy Federal Credit Union. “Inventories and new home prices remain high, so a drop in mortgage rates and prices would likely trigger a buying rush, but we shouldn’t expect such conditions until next year at the earliest. ”
Until that happens, there will be a mismatch between high prices and buyers’ budgets, said Kelly Mangold of RCLCO Real Estate Consulting.
“Motivated buyers who are able to afford the rate increase or who can buy with cash face a much less competitive buying landscape than at the start of this year,” she said.
Wall Street bonuses are expected to fall at least 22% this year after last year’s big payouts, according to a new report from New York State Comptroller Thomas DiNapoli.
A slowing economy, geopolitical chaos and increased inflation have all contributed to drying up the number of IPOs and mergers and acquisitions being made on Wall Street. This means the fees received by investment bankers have fallen from their 2021 records.
“The past two years of benefits and bonuses fueled in part by the extraordinary federal response to the pandemic were unsustainable,” DiNapoli said. “As the industry slows in 2022, major companies are reviewing their staffing and office space needs and a prolonged downturn could negatively impact state and city coffers.”
Pretax profits for Wall Street firms for the first half of the year were $13.5 billion, DiNapoli said. That’s down 56% from the $31 billion earned in the same period last year.
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